6 Ways to kick off your personal finance new year the right way

The popular thing to do with most people each new year is to set resolutions. I am not a big resolution person as I find setting goals much more effective (JD over at Get Rich Slowly recently wrote an excellent article on this same topic). I considered writing about 2008 goals, but instead thought I would provide you with some ways to kick off your personal finance new year that will have a positive influence on your finances. I would encourage you to turn these into either goals or resolutions, which ever work best for you.

Here are 6 things you can do to kick of your personal finance new year the right way:

1 – Follow a budget

For some reason, creating and following a budget is a simple thing to do, yet very few people seem to do it. I recommend creating a zero based budget on a month to month basis. A zero-based budget is where every dollar of your income gets spent via an expense category in the budget. In other words, each incoming dollar is assigned a home. The end result is that your expected income minus your expenses is $0. Do this for each month, creating a unique budget for each month. Too many people try to create one budget that covers all months. That is just too complicated and seldom works.

The most simple way to do a budget is on a basic sheet of paper. Other options include using a spreadsheet, or even better, budgeting software like You Need A Budget or Mvelopes Personal 3.5. I would suggest starting on paper at first and getting used to the concept of budgeting, then moving to am more automated solution to make it even easier. Personally, I’ve been using a spreadsheet for the last year but will begin using You Need A Budget this month.

In order to make a budget successful you have to track your expenses. It makes no sense to create a budget if you don’t track your spending against it. This is easily done by either writing down all of your expenses or by relying on your bank’s online banking features (which is what I do). I recommend updating your expenses daily so it only takes a few minutes.

2 – Do your finances together

If you are married, I strongly advise that you do your finances together as a couple. Develop your budget together and track your spending together. I also recommend that couples have weekly budget meeting. This is where they review their spending and track it against the budget. If adjustments are needed, they determine what to do together and adjust the budget. This keeps both spouses involved and makes them feel as if they have ownership in the process.

Chances are, only one of you is going to be the detailed person (or what I call the “geek”). I’m the geek in my marriage and I develop the initial budget, do all of the tracking and then my wife and I review it together and agree on it.

You can read more on how my wife and I both manage our finances together by reading these articles:

3 – Establish a base emergency fund

In order for a budget to work and to keep you from relying on your credit cards, an emergency fund is required. Financial experts generally recommend having 3-6 months worth of your salary in an emergency fund. While I agree, this is a significant amount of money and will take most people a while to save up. If you are in debt (i.e. you owe balances on borrowed money other than your house) you should start with a base emergency fund, something around $1,000. Mine is actually a little higher, fluctuating between $1,500 and 2,000 due to the fact I have 6 children. Regardless, $1,000 is a good starting point.

When you go overbudget either due to planned or unplanned expenses instead of reaching for the credit card, pull from your emergency fund instead. Good examples include: unexpected car or house problems, unplanned medical expenses, unplanned travel, etc. I started with a $1,000 emergency fund last year and haven’t needed my credit cards since.

If you have credit cards with outstanding balances cut up your credit cards now. If shredding is too boring for you, read through my list of 10 creative ways to cut up your credit cards…just be careful! Seriously, we as a society have become far too dependent on credit cards to both carry us through tough times and/or to avoid having to patiently wait to get something we want. We are a”I want it now society“.

If you carry a balance and can’t payoff your balance each month, you don’t need a credit card. Cut it up, use cash or your debit card and stop throwing your money away by giving it to the already rich credit card companies.

You can read more about my views on credit cards by reading these articles:

5 – Create a debt snowball and start snowflaking

This step is all about attacking your debt…with a vengeance. A debt snowball in a nutshell is basically listing all of your outstanding debts (except for your mortgage) in either interest rate order (greatest to least) or in balance due (least to greatest order). Except for the first item, you pay all minimums. For the first item, you pay as much as you can.

For example, I pay minimums on two of my credit cards and our car loan. The first item on my snowball is our Chase card. I pay $1,000 a month on our against our Chase card which thanks to the debt snowball will be gone by the end of January. The snowball concept comes into play once you’ve paid off that first item. You then take the payment you were making and add the minimum of the next payment and begin paying that amount on the next in line. You are basically snowballing the payment amount as you pay off each debt.

I also use a technique that I learned from I’ve Paid for this twice already called snowflaking. Snowflaking is basically taking whatever spare money you have (or receive) and paying it against your debt. I often make 5-10 payments a month on my Chase card.

6 – Frugal up

This is all about the golden rule of personal finance: Live on less than you earn

Before I started this blog I always thought being frugal met being cheap or even being a miser. After first starting this blog, I realized I wanted to be frugal, but wasn’t sure what it was or what it met exactly. What frugality really means, at least to me, is using your money as efficiently as you can. It means getting the most out of each dollar, and actively pursuing opportunities that allow you to do that.

I’ve also learned that being frugal is fun and rewarding. Take a hard look at your budget and really begin to look at where your money goes. I guarantee you can find areas where you are just wasting money. Even better, write down every dollar you spend for 30 days in a notebook. At the end of the 30-days, review it. Trust me, you’ll be shocked at how much you spend and where you spend it. Use this as further feedback into your budget.

Where can you learn to be more frugal? Well, read this blog or better yet subscribe. I provide money saving tips each Monday to help you be more frugal. I would also highly recommend reading Being Frugal, a friend and fellow M-Network blogger. You can also browse my blog roll for a number of other frugal blogs that will give you tons of ideas.

I am personally doing all of above and have been doing these practices for over a year now. I can’t make any guarantees they will work for you, but they have worked for me and I am confident they will for you as well. Not sure? Just pick one and try it, you will see a difference. No matter how much (or how little) you make each month, these practices apply.

It’s a new year, time for changes, resolutions and maybe even time for a new beginning. Forgot those mistakes of the past, and start anew. Get control of your finances instead of allowing your finances to control you. You can do it!

If you plan to put any of these practices in place, please let me know by commenting below. Studies show that 90% of commitments made in public or in writing are actually completed. Are you already doing some or all of these and they are working for you? Please share your story to encourage others.

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I have created a written spending/savings plan on paper (I am a planner by nature, and so I prefer to call it a “plan”), and it is working really well for me. I did also make an Excel spreadsheet that predicts the balances of my savings accounts and my credit accounts. I played around with the numbers a bit so that I could plan for debt snowballs while still keeping an emergency fund (currently covers 3+ months of take-home pay) and build some savings accounts for other goals.

After reading a book about a couple who chose to spend as little as possible for a year, I seriously cut back on consumption — borrowing books from the library rather than buying them, delaying purchases and questioning them, etc. My spending has become more conscious — I did need to buy some new winter clothing, for example, but I thought carefully about what to buy, bought really good quality stuff that will not need to be replaced for years, and then talked myself out of other things (new flannel slippers, for example) that I really did not need to replace just yet.

Snowflaking to my credit card debt has really worked for me. I have an extra column in my Excel spreadsheet for snowflakes, and I enjoy watching the balances for future months drop down and my payoff date move up every time I add a snowflake amount! It becomes a game to me to find “extra money” to use for snowflakes: cash gifts, reward checks, a portion of my overtime pay, money that I didn’t use by the end of the week for gas or groceries, rolled coins from my change jar. For the last few months, my snowflakes have been between $75 and $100 per month.

I promised myself to spend as little as possible for 18 months while eliminating debt, and I have done well so far. After that, I will change my snowball and snowflakes to savings rather than debt. I will also look at more ways to be frugal, so that I can reach my goals faster! And I may also have a spouse by then, so we can create a new spending plan together at that point and make a game out of finding frugal alternatives and doing things ourselves. Once I pay off my debt, I will keep my awareness in my spending and will be earning interest rather than having to pay it.

@Lynnae – I’ll keep working on you about the credit cards ;-) Maybe we can help each other with YNAB. I’m looking forward to using it…tired of dealing with the spreadsheet!

@Justin – I didn’t address retirement in this particular article, but it is a good point. This was really targeted at readers who are really in trouble financially. You point is VERY valid though for folks that have reasonable control of their finances.

I have 6% of my income going into 401k now. Want to do more, but funneling it towards paying off my debt first.

@speedy – Hi speedy! Awesome comment. I appreciate you sharing your ideas and story. Sounds like you are right on track! I love playing the snowflaking game too. At this point I’m taking any income I generate from this blog and using it to snowflake payments as well. Thanks again for the great comment!

paidtwice – You’re welcome and thanks for being the Snowflaking Queen :-)

Re: Retirement. True enough, however I am one of the people that believe that even if you are in trouble that you should still try and put some into your tax deferred account through work if it’s available to you. Especially if you have a match. Even 2 or 3%. Anyone that is trying to pay off their debt will have a good chance of getting there, even with a small amount syphonned off for retirement, and that amount has more time to grow. Yes, I know money is fungible, but this is one case where I feel the beahviourists have it right on saving.

WJ Says:
January 2nd, 2008 at 7:06 am

Great article. Let me know how the YNAB goes. The only budgeting software that I have tried was built into Microsoft Money, and I hated it. For the last couple of years we have been using a spreadsheet, and pencil and paper, but it would be nice to try something a little more colorful!!

I was pleased that you mentioned that there is no “all purpose, year round budget.” I tried to budget off and on for ten years and would usually file them in the trash by the end of the second month.

@WJ – Thank you. Sure, I’ll keep you all posted on YNAB. Plan to do some reviews of the various financial products next month. Lynnae over at Being Frugal recently did some reviews. You might want to read what she wrote.

As for the one budget, I did the same exact thing. Even used Quicken for a while, that didn’t work either.

@cedella – Exactly. They LOVE it when you pay minimums. I’ll be done with Chase very soon and will never be a customer again. Good luck on living without plastic! Don’t let them win :-)